Auto exposure to drag Schaeffler's growth this year as vehicle sales drop

Localisation, industrial segment to offset some pressure

Despite a 13 per cent gain since the start of the month for the stock, the near-term outlook for Schaeffler India remains muted. The 74 per cent subsidiary of the Schaeffler group of Germany and the second-largest Indian player in the bearings segment faces headwinds in the automotive and industrial segments. 

Within the auto segment (43 per cent of overall revenues), a significant chunk comes from supplies to auto makers (original equipment manufacturers, or OEMs). With retail sales in the passenger and commercial vehicle segments falling sharply, the company’s revenues have been impacted. 

Some of this was reflected in the 21 per cent year-on-year (YoY) fall in overall revenues in the March quarter (Q4). Results in the quarter were also impacted by the loss of sales from March 23 because of Covid-19. The replacement segment, which accounts for a third of auto segment sales offset the decline in the OEM segment in Q4, given servicing requirements of vehicles. The firm is now looking at increasing content per vehicle by 30 per cent and should benefit from the sector’s transition to BS-VI emission standards.

 

 

The industrial segment, however, has been more resilient — both in Q4 and the calendar year 2019. Within the segment, which accounts for 47 per cent of overall sales, off-road construction, power transmission, and wind businesses did well. The management expects near-term challenges for the auto segment, while select pockets within the industrial segments are expected to do well. 

Despite the drop in sales, the company managed to maintain profitability on the back of better product mix and cost efficiencies. Margins came in at 14.8 per cent, lower by 10 basis points over the year-ago period. The company has also increased research and development outlay leading to an improvement in localisation content. This is expected to lower outgo to parent (technology and trademark expenses), rationalise costs, make products competitive, and improve profitability. 

In the near term, however, Sandeep Tulsiyan of JM Financial expects the auto segment to be under pressure because of a cut in discretionary spends while the industrial segment could be pegged back by a fall in capacity utilisation.